Why Worry About Bullion Silver?

After reading somewhere that bullion silver might become unavailable in a future shortage, someone asked why worry about bullion silver since there is plenty of more refined coins and bars and other silver items that could be melted for use in industry. My response:

Bullion silver is likely to be less pure than coins or small bars, but 1,000 ounce bullion silver bars are cheaper per ounce than the smaller fabricated sizes. Bullion silver is typically available for only a few cents more per ounce than the spot price in the paper futures market. So long as bullion bars can always be purchased at little more than spot price, a business that simply melts the bars would never pay more to melt fabricated silver, even if it is more highly refined. If the business could not buy cheap bullion bars locally, it would simply go long a futures contract and then stand for delivery of the physical bullion silver. If a company cannot get bullion bars from the futures market to consume for its production needs, then there will be a delivery default on the futures exchange. Publicity about that default will immediately result in panic buying by all industries that need to consume bullion silver, but do not have a surplus stock on hand because they depend on just in time delivery. Imagine the additional buying that would be contributed by investors and speculators when news of a default spread. When the futures exchange defaults on delivery of physical, then all buyers of paper contracts would demand delivery, but no one would sell a paper contract if it obligated them to deliver real physical metal that is not available. The silver price in a delivery default might not make it all the way to the moon, but you can be sure that the price spike would be much higher than you can imagine.

The silver byproduct effect and future impact

Another poster was beating his new drum again about how byproduct silver will depress the price of silver for decades to come. I felt compelled to respond:

I have heard the repetitive noise your new drum makes, but it is not music to my ears. The byproduct factor in silver is not new. It was noted by many people even before it was prominently discussed in September 2005 (When Will the Price of Silver Explode?). I mentioned the byproduct situation several times over the past few years, because I see it as a huge positive for the very high price that silver could explode to when a slowing world economy forces base metal miners to reduce their mining output. It is the silver produced as a byproduct that prevents a silver shortage from being obvious. I expect an explosive price rise when the amount of that byproduct is reduced and the veil of just in time supply of byproduct physical silver is lifted from the eyes of industries that consume silver, as well as from investors who do not yet see the delivery problems that will become obvious to all in the future.

A different person read about the byproduct "news", and said it will cause him to be more cautious with future purchases. I responded:

Sorry, but that dog does not hunt. During the decade from 2000 to 2010, third world nations (China, India, Mexico, and others) were massively building their production industries in an effort to ramp up their economies. That rapid buildup created an immense demand for base metals, and the base metal miners responded by substantially escalating their mining output, including the amount of byproduct silver they dumped onto the market. So how did all of that byproduct silver affect the price of silver during the decade? The price increased from approximately $4.30 in 2003 to $8 in 2004, from $6.60 in 2005 to $14.30 in 2006 to $21.40 in 2008, and from $8.40 in 2008 to almost $50 in 2011. Those price increases were all during the unprecedented industrial buildup in several nations. That buildup consumed huge amounts of base metals, so the miners also generated massive amounts of byproduct silver. Fast forward to now. With the world economies slowing under heavy debt loads, and with the industrial growth rate in China and other emerging nations slowing to much smaller increases, the now mature emerging market industries do not have the rapid growth pattern that marked the decade of 2000-2010. Reduced growth rates directly diminish the demand for base metals, and base metal prices are lower as a result. It is only a matter of time until base metal miners cut back further on their production, and that will also reduce the amount of byproduct silver produced. Meanwhile, silver consumption continues to rise as the newly affluent workers in the emerging nations improve their lifestyles by purchasing things that consume silver to produce. Reduced supply and increased demand will tip the scales to an obvious delivery problem. The resulting silver purchases by industries and investors will be unprecedented, with a price rise that will be legendary. YMMV so DYODD

The conundrum of rising mining costs, but low silver prices

I see a simple explanation for that conundrum. There has been ample physical silver produced to satisfy all buyers of physical silver. With plenty of physical available, the Banksters have no restraint on their illegal manipulation and suppression of the price of silver. That ample supply of physical silver came, not from primary silver mines, but from byproduct as base metal mines maximized output in response to inflated prices and speculative demand for base metals. But times, they are a changing. China has finally taken steps to reduce some of the speculative excesses there, and an ever deepening world wide recession is adding to a glut of base metal in storage. Dr. Copper prescribes lower prices for base metal, and lower production rates are sure to follow. Reduced production of base metals will also reduce the amount of byproduct silver that is produced, and that in turn will curtail the currently ample supply of physical metal. IFdemand continues as strong as it has been, and IF the reduction in supply of byproduct is sufficient to substantially reduce the amount of physical silver supplied to the market, then Banksters will no longer be able to control the price and a price explosion will follow. "When?" is always the question.

The plunge in copper can push silver higher

Dr. Copper has a new prescription, and it does not look bullish for some markets, but I continue to think silver will be an exception. The recent price plunge in copper will translate to reduced output from copper mines, and probably also from mines of other base metals. Since approximately 70% of new silver production is byproduct from base metal mining, the supply of new silver will drop sharply along with the reduced base metal mining output. As other factors continue to push the demand for silver higher, at the same time that the supply of silver drops, the resulting higher prices will create a vise to squeeze the silver shorts. The timing is uncertain, but I think accumulating silver below $25 will prove to be very profitable.

Could hyperinflation be imminent?

Someone asked why buy gold and silver when there is no inflation and hyperinflation seems impossible? Here is my reply:

I see things as unchanged (except for being worse) from June of last year:

Optimist: My view is that low velocity of money is much like a dam (operated by banksters) that is releasing only a small amount of water. Even though the FED is dumping massive amounts of water behind the dam (so that the water level is rapidly rising), the farmers downstream are complaining about a deflationary drought because they see so little water being released. That will change in a New York minute when the dam breaks or the banksters open the floodgates. All those who are complaining about deflation need to have their silver and gold life raft inflated and ready to use quickly when it is needed.

Another appropriate analogy is a mountain range covered in an unstable level of very deep snow (US$), and the FED keeps dumping more "snow" on top every day. An avalanche is inevitable. The question is when a trigger will begin that avalanche. That trigger could be imminent. Over the next three weeks, rampant rumors of a USA debt default (resulting from a failure to raise the debt ceiling) will reverberate around the world with increasing intensity. If there was a true debt default from a politically paralyzed USA government, the US$ exchange rate would plummet compared to more stable currencies. Nations and individuals who hold dollars will be pressured to dump them in advance of the potential debt default to salvage whatever value they can before everyone else tries to squeeze through the small $ exit door at the same time. The US$ exchange rate is already down significantly, and everyone knows that it could literally waterfall to much lower levels. It would take only one nation (or perhaps just a few wealthy individuals) to panic and be the first to dump dollars to trigger the avalanche.

FWIW, I do not think a debt default will happen. My guess is that if Congress remains uncooperative, the President will unilaterally declare the debt ceiling to be null and void (by virtue of the 14th amendment), so the FED can continue to print as much new funny money as needed to buy everything the government wants to spend money on. But it is of no consequence what I think. If big money panics to dump dollars before a possible debt default, then the potential exists for the rest of the world to pile on and for the US$ to quickly move to its tiny true value. When that feeding frenzy of $ selling at any price begins, it will be impossible to buy a lifeboat of physical precious metals. For the sake of those who are not fully invested in advance, let's hope that the dam will not break and the avalanche will not start this time.

Do the FEDanksters want metals prices to rise, but slowly?

In response to a comment that a correction could happen over the next few weeks, I said:

That is close to my Wild A$$ Guess. Metals could extend this rally for a few more days, but then I expect that the banksters will step on silver again, just in time to rain on the parade of anyone who is thinking about taking delivery of the September contract. My conspiracy theory is that the banksters are no longer as much focused on making profits, but now they are more concerned about managing metal deliveries.

A follow up question was why would the banksters have recently gone long metals if they plan to further suppress the price, and I replied:

My guess is that the banksters are acting in collusion as agents of the FED (which is why the banksters are never punished for the things they do), but that the FED keeps them on a short leash. My new and original (Google cannot find it as ever used before) term for the FED plus the banksters is FEDanksters. Although the past bankster actions to suppress metals prices have been profitable, that bankster profit was serendipitous to the FED’s agenda to support the dollar by depressing metals, which are the only real competitor to the dollar. In theory, metals depression could have continued much longer, and driven prices much lower, but the FED is alarmed by the dramatic rise in accumulation of real metals by nations and investors. My guess is that the FED now wants metals prices to rise (so that higher prices will discourage physical accumulation), but at a slow pace to control the level of bullish enthusiasm that rapidly rising prices would generate. If that view is correct, then the FEDanksters have been accumulating metals into the decline, not to profit from the subsequent rise in metals prices, but to have ammunition they can use to sell into those rallies to control the level of bullish sentiment. I would be surprised if the FEDanksters press the short side hard enough to cause much lower prices. My guess continues to be that the FEDanksters’ new game plan is to allow metals prices to rise slowly over time, but to prevent prices from spiraling higher in a way that could get out of control. As one small data point, the JPM house account accumulated a large amount of silver by stopping (taking delivery) 82% of the July contracts tendered by the shorts. If JPM was intent only on making profits, then the way to do that would be to continue to accumulate at current low prices. Instead, so far this August (off cycle for silver delivery), the JPM house account has issued (delivered) 69% of silver contracts. That is consistent with a FEDanksters agenda to slow the rise in metals prices to dampen the level of bullish enthusiasm. For anyone interested in politicians and FEDanksters, it is good advice to ignore what they say, but watch what they do.